How much could worker-centric trade policy help American workers?

Richard Baldwin, 31 May 2024, Factful Friday

Introduction.

“As an integral part of economic policy, trade must also be a part of any social contract,” wrote the US Trade Minister, Katherine Tai, in this week’s FT this week .

That’s an excellent point. America will need joined-up thinking to fix its failed social policy. And fixing is needed. Americans are suffering an economic malaise that is rather unique among the world’s rich nations (more on this below).

Tai blames market fundamentalism. “A laissez-faire system has allowed short-term profit-driven businesses to maximise their gains,” Tai writes. “While profits and executive pay soared, workers were left behind … communities were devastated.” While I wouldn’t put it in those words, all the facts are clear in the data. But how to fix it?

A quick rant.

There has never been any “fair” in laissez-faire; fair is the government’s job. Since FDR’s New Deal, governments in all advanced economies realised that the market should be left in charge of efficiency. The government should be in charge of social prosperity. Market for efficiency; government for justice. That’s the winning ticket. Expect calamity when the political system chooses efficiency without enough equality, or equality without enough efficiency. Well, I’m glad I got that out of my system!

The question at hand.

So the question is:

• How important is an activist trade policy when health, pension, labour, housing, and education policies are based on trickle-down economics?

What can higher steel tariffs do for Americans’ prosperity when families with big banks accounts get good health care, secure retirements, and excellent education, while families with small banks accounts flounder?

This Factful Friday presents some facts about the importance of trade for American workers and throws in a dash of fact-checking for fun.

How exposed are US workers to trade?

“The American economy has been and remains an open one,” according to Tai. “That, however, has meant that American workers were particularly exposed to the harms from such behaviour.” Where with ‘such behaviour’ she is referring to “monopolistic behaviour by countries such as China.”

Actually, the first part is not true. The American economy is open, but much less open than other advanced economies – the ones that have managed to turn a quarter century of rapid automation and globalisation into prosperity for their average citizens (more on this below).

The left chart reveals that only 9% of US employment produces goods and services that are exported. This is 50% less than the figure for Japan and between a half and a third of what it is in the rest of the G7.

The right chart shows US imports of all goods and services as a percentage of US total production of goods and services. It demonstrates the fact that – on the import side – US production faces much less import competition than other advanced economies. The US import-to-production ratio is 60% of the world average, two-thirds of Canada’s, and half of Britain’s.

So no, American workers are not particularly exposed. Relatively speaking, American workers are pretty shielded from trade. US economic malaise is mostly homemade.

How sweet is it to blame trade for domestic policy failures?

Tai’s essay provides some very unsubtle hints as to why Biden is making a much bigger deal about trade policy than most G7 nations when in fact trade plays feeble role in the US compared to other G7 nations.

The telling example Tai picks is worker-protection policy. “Ohio or Pennsylvania or Arizona have been set against workers in Mexico, where rights have been unfairly suppressed.” The US has used its trade agreement with Mexico to improve Mexican labour policies. Let me repeat that to be clear. The Biden administration is hard at work to improve conditions for Mexican workers. While trying hard, Biden is not doing much to bring American labour policies up the G7 standards since there is no consensus in the US body politic for doing so.

Since I was in the White House in the Bush Sr Administration, it has been clear that improving US worker rights is the “third rail” of American politics. Touch it and your party’s election prospects dies. The US, for instance, hasn’t even ratified the ILO convention of basic worker rights.

Suppose you are an American progressive frustrated as hell that it is politically impossible to raise US labour policies up to the G7 average. I can understand that talking loudly about other countries’ labour standards could be soothing to the soul. And politically, addressing labour problems abroad – just to show you care – might even help push domestic solutions.

Tai gives away the stratagem by name-checking workers in Ohio or Pennsylvania whose votes will determine whether Joe Biden gets to keep his job. And to be fair, the Biden administration is probably pushing as hard as is politically possible for better US labour rights.

America’s relative malaise.

If, as Tai asserts, “communities have been devasted,” these facts make it difficult to believe that trade was a big part of the problem. We have good evidence that trade hurt workers, but why wasn’t the China Shock offset by good tax, health, pension, housing, education, and labour policies as it was in Europe?

The time has come in this Factful Friday to look, as promised, at the facts on how US workers – who are relatively insulated from trade – have fared compared to G7 nations which are far more open.

Economic malaise: American exceptionalism.

Life expectancy is a pretty good barometer for society-wide prosperity. It depends upon the quality and quantity of nutrition and healthcare provided to citizens from pre-natal to end-of-life. Housing, fitness, family, and mental health matter. But this has to be for most people. Getting the top 1% to 95 or? 100 will not compensate for mediocre case for the bottom half.

The left chart shows that US life expectancy was rising with the lead group up until about 15 years ago. Then it stagnated. The US is a complete outlier here. And worse yet, for the prestige of America’s social policy, it declined after Covid. China’s life expectancy (if the data can be trusted) surpassed recently.

The right chart, which is for people 45 to 54 years old, is even grimmer and requires even less explanation. Americans who should be in the prime of their working lives are killing themselves in droves. Anne Case and Angus Deaton call these the “deaths of despair”. People in other G7 countries aren’t.

Tai’s point about workers being left behind is plain as day in the next chart. The 1% are making out like bandits. This is not a unique to America, but only the US is back to the ‘Robber Barron’ days. And other G7 nations like France and Japan didn’t see this measure of inequality rise very much.

All these nations experienced the same rapid automation and globalisation that the US did since 1980. But their indicators of socio-economic wellbeing didn’t crater like the US’s. ?

Somehow, these other rich nations managed their social policies (health, education, housing, pensions, unemployment, retraining, etc.) in a way that the allowed the changes to create broadly spread prosperity.

Summary and concluding remarks.

The facts are clear.

·??????? American socio-economic outcomes have been systematically worse than those of other G7 nations since the acceleration of automation and globalisation disrupted manufacturing worldwide.

·??????? The US economy is much less exposed to the trade aspect of this shock than are other G7 nations.

Very little of the difference, in my view, has to do with trade policy. And getting tough on imports seems very unlikely to reverse the trends. Trade just doesn’t matter enough for the American economy. ?In my view, what America needs to do is:

• Protect workers, not jobs.

This judgement is based on correlation, not proven causality, but as I always say: first-order causality almost always leaves glaringly obvious correlation in the data, so correlation is a good place to start.

In the Annex, I’ve thrown together a few charts that suggest that two parts of US social policy have failed to help Americans cope with the economic shocks of the last couple of decades.

Annex

To be a bit more concrete about the US’s failed social policy, I clipped a few charts concerning the US pension system and outcomes, and a comparison of a cost of university in the US and comparator countries to have a look at one aspect of education policy.

Pension failure.

American poverty rates are terrible compared to other G7 nations, shockingly so for Americans of 75 years old (left chart). The right chart shows that if trickle-down worked, the US pension system would be the envy of the G7. It didn’t work. The right chart shows that Americans who have enough money throughout their working lives to contribute to their tax-deferred plans are doing rather well. On average, however, the US is below the OECD average.

The next chart shows that while US old-age incomes are high on average, they are very unequal. Moreover, the US safety-net old-age benefits are significantly below the OECD average, and US poverty rates are far above OECD averages for the +65 crowd.

High priced public education.

The next chart shows that US higher education in public institutions is far, far more expensive than it is in other high-income countries (except the UK). The chart shows that the US annual cost is between 2 and 9 times more than it is in most other G7 nations.

As higher education is a key to upward social mobility in a world where less than 10% of workers end up in factories or on farms, the high cost means that families with comfortable financial situations have no problem with paying, while those who struggle from month to month cannot pay. ?

References.

Tai, Katherine (2024). Trade must transform its role in the social contract, FT Opinion Piece, 28 May 2024. https://www.ft.com/content/91f22f38-6595-4b08-bebe-948c628fa736?shareType=nongift ?

Case, A., & Deaton, A. (2015). Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century. Proceedings of the National Academy of Sciences, 112(49), 15078-15083. https://doi.org/10.1073/pnas.1518393112

Case, A., & Deaton, A. (2017). Mortality and morbidity in the 21st century. Brookings Papers on Economic Activity, 2017(1), 397-476. https://doi.org/10.1353/eca.2017.0005

Case, A., & Deaton, A. (2021). Accounting for the widening mortality gap between American adults with and without a BA. Brookings Papers on Economic Activity, 2021(2), 301-387. https://doi.org/10.1353/eca.2021.0018

?

?